Traders Find Libor Manipulation Hilarious, Instant Messages Show

A former Royal Bank of Scotland trader claims the bank knew all about Libor manipulation and says he has the instant messages to prove it.

Libor is a joke.

Don't get me wrong, the London Interbank Offered Rate, or Libor, is deadly serious business, affecting $350 trillion in derivatives contracts and all sorts of borrowing costs around the world. Your adjustable-rate mortgage or corporate loan is probably based on Libor. A big deal, then.

But it has long been a hilarious joke to traders, as some new instant message transcripts dug up by Bloomberg show. The transcripts, which are evidence in a wrongful-termination suit by a former Royal Bank of Scotland trader, show RBS traders breezily chatting back and forth about how much fun they're having jerking around this important interest rate.

The rate is set every day by 16 banks that self-report their borrowing costs to a central authority, the British Bankers Association. The giant conflict of interest in this process is that these same banks also have derivatives desks that can profit if Libor is moved by just a few tenths of a percentage point higher or lower. The banks long ago discovered that they could manipulate Libor without much trouble, and it's looking more and more like they did so at every opportunity.

On another occasion, in August 2007, Tan requested that another trader, Neil Danziger, move Libor higher, and the global head of RBS treasury markets in London, Scott Nygaard, responded, "Go Neil. Hahahaha."

Yes, hahahaha! The great thing about Libor manipulation is that it is easy, profitable and hilarious.

Tan is suing RBS, saying his bosses knew full well that Libor was just a trader's plaything, and he's dragging out all of this IM traffic to prove it. The bank, which is mostly owned by the British government, says it is cooperating with regulatory investigations into its Libor practices.

I talked with some of my more experienced colleagues about this. They told me banks misreported the Libor rates in a way that would generally bring them profits. I had been unaware of that, as I was relatively new to financial trading. My naivety seemed to be humorous to my colleagues.

Libor fraud: Making traders laugh since the Clinton administration.

It took regulators decades to finally get around to doing something about Libor, a process that began in earnest last year. Totally coincidentally, that is when Tan and other traders seemed to stop and wonder if there was anything wrong with what was going on:

“Question is what is illegal?" Tan said in one exchange in May 2011. "If making money if bank fix it to suits its own books are illegal... then no point fixing it right? Cuz there will be days when we will def make money fixing it.”

Tan was fired not long after.

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Libor Scandal Timeline

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Barclays allegedly began manipulating the Libor rate in 2005 and allegedly stopped manipulating Libor in 2009, according to Businessweek. But other reports indicate that Libor fixing may have spanned decades.

A Barclays employee told an analyst from the New York Fed's Markets Group that Barclays was indeed using false information to set the interest rate on April 11, 2008, according to recently released Federal Reserve documents.
"We know that we're not posting, um, an honest LIBOR," the Barclays employee told the New York Fed's Fabiola Ravazzolo, according to a transcript of the phone conversation.

In June 2008, then-president of the New York Federal Reserve Timothy Geithner sent a memo to British banking authorities expressing concern over the "integrity and transparency" of the key interest rate. Geithner did not inform British regulators that a Barclays employee admitted that Libor was being rigged, according to Reuters.

During the 2008 Financial Crisis, the U.S. government lent money to cash strapped banks and AIG using Libor to determine interest, Treasury Secretary Tim Geithner told Congress on July 25, 2012. The artificially low rate saved the banks and AIG billions, while costing tax payers the same amount.

In April 2010, then-UK Business Secretary Peter Mandelson told theTimes of London that then-CEO of Barclays, Robert Diamond, was "the unacceptable face of banking" after the bank announced that its CEO would receive a bonus of 63 million pounds, Sky News reports. Mandelson also told the Times that banking bosses were expected to act with "a bit more modesty, a bit more humility" than Diamond's behavior.

On June 27, Barclays disclosed to its shareholders that it would be fined $450 million by U.S. and U.K. regulators for conspiring to manipulate the Libor rate between 2005 and 2009, The Telegraph reports.

On July 2, Barclays announced that it's Chairman, Marcus Agius, would be resigning in the wake of the Libor rigging scandal. In the official resignation letter, Mr. Agius stated that the Libor rigging constituted "unacceptable standards of behaviour within the bank." He went on to say:
As Chairman, I am the ultimate guardian of the bank's reputation. Accordingly, the buck stops with me and I must acknowledge responsibility by standing aside."

On July 3, Robert Diamond resigned as Barclays CEO, The Washington Post reports.

On July 3, Barclays announced that Marcus Agius would be reappointed as the bank's full-time Chairman following the resignation of Robert Diamond.

On July 3, Barclays released phone records between CEO Robert Diamond and the Deputy Governor of the Bank of England, Paul Tucker, that indicate that the BoE executive encouraged Barclays to manipulate the Libor rate, The Wall Street Journal reported.

On July 4, Bob Diamond told a U.K. parliamentary panel that he believes other major banks were involved in Libor rigging, The Wall Street Journal reports. He also stated that fear of being nationalized during the 2008 Financial Crisis contributed to its actions.

Barclays CEO Bob Diamond agreed to forgo an extra $31 million bonus, the bank announced on July 10, according to the reports Wall Street Journal. Diamond will still net his salary and pension for a year, which is worth about 2 million pounds.

At least 16 banks were reportedly under investigation for Libor rigging as of July 11, according to Reuters. In an internal bank memo circulated on July 13, Barclays executive committee told employees that, "As other banks settle with authorities, and their details become public, and various governments' inquiries shed more light, our situation will eventually be put in perspective," TIME Magazine reports.

On July 25, the European Union proposed making the rigging of international interest rates a criminal offense.